Drawdown and Maximum Drawdown in Indian Markets

What Drawdown Actually Measures

Drawdown is the fall in the value of a trading account or portfolio from a high point, called the peak, down to its lowest point, called the trough, before a new high is reached. It is almost always expressed as a percentage of the peak. If your account climbs to Rs 5,00,000 and then slips to Rs 4,00,000 before climbing again, you have suffered a 20 percent drawdown even though you never withdrew a rupee.

The key idea most beginners miss is that drawdown is measured against a running peak, not your starting balance. Every time your equity makes a fresh all time high, the peak resets upward. Drawdown is then the distance below that most recent peak. This is why two traders who both ended the month flat can have very different drawdowns. One may have gone straight sideways while the other rocketed up 40 percent and then gave it all back, which is a brutal drawdown even though the closing balance looks identical.

For Indian traders on the NSE and BSE, drawdown is the single most honest number about risk management. Returns tell you how much you made. Drawdown tells you how much pain you had to sit through to make it, and whether you would have stayed in the game emotionally and financially long enough to see the recovery.

Maximum Drawdown vs Current Drawdown

Current drawdown is how far you are below your latest peak right now. If your peak was Rs 6,00,000 and your balance today is Rs 5,40,000, your current drawdown is 10 percent. The moment you print a new high above Rs 6,00,000, current drawdown resets to zero.

Maximum drawdown, often written as MDD, is the single largest peak to trough fall that happened anywhere over the period you are studying. It does not matter when it happened. If at any point in the last year your equity fell 32 percent below a prior peak, your maximum drawdown for the year is 32 percent, even if you finished the year up 50 percent. MDD is the worst case you actually lived through, and it is the number professional risk managers and SEBI registered portfolio managers care about most.

A Fully Worked Maximum Drawdown Sequence in Rupees

Let us walk a realistic equity curve for a Bank Nifty options trader who starts with Rs 5,00,000. The table below shows the closing account balance after each of twelve trading sessions. We track three things at each step: the running peak (the highest balance reached so far), the drawdown in rupees below that peak, and the drawdown as a percentage. All numbers are illustrative and not a promise of any return.

Read the curve carefully. The peak balance reached was Rs 5,90,000 on Day 3. The lowest the account fell after that peak was Rs 4,25,000 on Day 7. The maximum drawdown is therefore the fall from 5,90,000 to 4,25,000, which is Rs 1,65,000 in absolute terms. As a percentage that is (5,90,000 minus 4,25,000) divided by 5,90,000, which equals 27.96 percent, rounded to 28 percent.

Notice that the trader ended Day 12 at Rs 6,40,000, a healthy 28 percent above the original Rs 5,00,000 start. A person who looked only at the final balance would think this was a smooth, winning run. The equity curve tells the real story: this account had to survive a 28 percent drawdown, sitting Rs 1,65,000 under water at the worst point, before any of that profit was locked in. That is the gap between return and risk that drawdown exposes.

The Recovery Percentage: Why Losses Hurt More Than They Look

This is the most important and most misunderstood part of drawdown. When you lose a percentage of your capital, the gain you need to climb back is always larger than the loss, because you are now growing from a smaller base. The recovery formula is: Recovery percent equals drawdown divided by (1 minus drawdown), all expressed as decimals, times 100.

Take our worked example. The maximum drawdown was 28 percent, meaning the account fell to Rs 4,25,000 from a peak of Rs 5,90,000. To get back to that Rs 5,90,000 peak, the trader needed to earn Rs 1,65,000 on a base of Rs 4,25,000. That is 1,65,000 divided by 4,25,000, which equals 38.8 percent. So a 28 percent fall required a roughly 39 percent gain just to break even. The deeper the hole, the more savagely this asymmetry compounds.

How Drawdown Plays Out in Indian F&O After Costs

Equity curve drawdown in Indian derivatives is not just about price moving against you. Your real, net drawdown is what remains after STT, brokerage, exchange transaction charges, SEBI turnover fees, GST and stamp duty. These costs eat the equity curve every single session, so an account can drift into drawdown even on a slightly winning day if costs are high relative to the edge.

Consider a concrete Nifty options trade. The Nifty lot size is 65. Suppose you buy 4 lots of a weekly Nifty 24000 call at a premium of Rs 120 and sell it the same expiry week at Rs 95, because the index drifted against your view. Your gross loss is the premium fall of Rs 25 times 75 times 4 lots, which is Rs 7,500. On the sell side, STT on options is charged at 0.1 percent of the sell side premium value (not the strike), so STT is roughly 0.1 percent of (95 times 75 times 4) equals 0.1 percent of Rs 28,500, which is about Rs 28. Add brokerage of around Rs 20 per order both ways, exchange transaction charges, 18 percent GST on brokerage and exchange charges, and stamp duty on the buy side, and your total cost layer is roughly Rs 120 to Rs 160 on this trade. So the net hit to your equity curve is about Rs 7,650, marginally worse than the Rs 7,500 price loss. These figures are illustrative; confirm live rates with your broker.

• STT on option selling is 0.1 percent of premium value on the sell side, a number that quietly deepens drawdown on high frequency intraday options trading.
• Futures attract STT of 0.02 percent on the sell side, plus the same brokerage, exchange, GST and stamp duty stack.
• Because F&O profit and loss is taxed as business income at your slab rate, your after tax drawdown recovery target is even higher than the pre tax math suggests.
• Equity delivery losses fall under capital gains, with STCG taxed at 20 percent and LTCG at 12.5 percent above Rs 1.25 lakh, a different regime from F&O.

Drawdown and Position Sizing

Maximum drawdown is the natural output of your position sizing, not a random act of the market. If you risk a fixed fraction of capital per trade, you can estimate the drawdown a losing streak will produce. A trader risking 2 percent of a Rs 5,00,000 account per trade loses Rs 10,000 on the first loss. After a string of, say, eight consecutive losses, the compounding of percentage based sizing on a shrinking balance produces a drawdown of roughly 15 percent, leaving about Rs 4,25,000. The same trader risking 5 percent per trade would, over the same eight loss streak, be down closer to 34 percent.

This is why professional desks obsess over the size of each bet rather than the win rate. You can survive a long losing streak with small position sizes, but a few oversized trades can produce a drawdown so deep that the recovery percentage becomes practically impossible. The 90 percent drawdown that needs a 900 percent gain almost always comes from oversizing, not from being wrong slightly more often than right.

• Decide your maximum acceptable account drawdown first, for example 20 percent, then work backwards to size each trade.
• A smaller per trade risk lengthens the losing streak you can survive without breaching your drawdown limit.
• Never increase size to recover a drawdown faster. That is the exact behaviour that turns a 28 percent dip into an account ending event.

Setting a Maximum Drawdown Limit

A maximum drawdown limit is a pre committed rule that says, if my account falls X percent below its peak, I stop trading and review. The point of setting it in advance is that you decide while you are calm, not while you are Rs 1,65,000 under water and tempted to revenge trade. In our worked example, a trader with a hard 20 percent limit would have flattened all positions on Day 6, when drawdown first touched 20 percent at Rs 4,72,000, and would never have ridden it down to the 28 percent low on Day 7.

Many disciplined Indian intraday traders run a layered system: a daily loss cap, a weekly loss cap and an overall maximum drawdown cap. Breaching the daily cap means no more trades that day. Breaching the maximum drawdown cap means a full stop and a written review before any new risk is taken. SEBI registered portfolio managers are required to disclose drawdown to clients precisely because it is the cleanest measure of downside, and you should hold your own account to the same standard.

Historical Drawdowns in Indian Markets

Index level drawdowns put individual account drawdowns in perspective. During the 2008 global financial crisis, the Nifty 50 fell roughly 60 percent from its January 2008 peak to its trough, one of the deepest index drawdowns in Indian history. A buy and hold investor needed the index to roughly 2.5 times from that low simply to reach the old peak again, which took years.

In March 2020, the COVID crash dragged the Sensex from around 41,000 to under 26,000 in a matter of weeks, a drawdown of roughly 38 percent. Unlike 2008, the recovery was unusually fast, with new highs within about a year. These two episodes show that drawdown depth and drawdown duration are separate risks: a shallow but multi year drawdown can be more damaging to a leveraged trader than a deep but quick one, because margin and time decay keep working against you the whole way down.

The Emotional Side of Drawdown

A drawdown is not just a number on a chart, it is a test of nerve. Watching an account sit Rs 1,65,000 below its peak for several sessions, as in our worked example between Day 4 and Day 9, triggers stress, doubt and the urge to do something. That something is usually wrong: cutting a good system at the worst moment, doubling size to win it all back, or abandoning a tested plan for a hunch.

The traders who survive drawdowns are the ones who decided their rules before the pain started. They size small enough that a normal drawdown is survivable, they have a written maximum drawdown limit, and they journal the equity curve so they can see that the current dip is within the range their system has produced before. Treat volatility driven drawdowns as the cost of doing business, planned for in advance, rather than as emergencies to be improvised through.

• Expect drawdowns. Every profitable system on earth has them; a strategy with no drawdown is a strategy that has not been tested long enough.
• Compare the current drawdown to your own historical maximum. If it is within range, your edge is probably intact.
• If the current drawdown exceeds anything your system has shown before, that is the signal to stop and review, not to size up.

Sources and Further Reading

For authoritative data and contract specifications, refer to NSE India and SEBI. Always confirm current lot sizes, STT rates, brokerage and tax rules on the official source before you trade, since these change from time to time.

Sources and Further Reading

For authoritative data and further reading on this topic, refer to Investopedia and NSE India. Always confirm current rules, rates and contract specifications on the official source before you trade.